Thoughts about Fraud Prevention, Payments, Machine Learning and more – by Ohad Samet

Let’s start with qualifications. I am not a payments industry pundit, and whatever payments experience I’ve had, it’s always been more on the risk and data side. I’m also a bit out of touch because I’m focused on my company, TrueAccord.

I’m also not an Apple fanboy or hater. I own a great 2 year old Macbook Pro and a Nexus 5; I don’t wake up at 3am to buy the latest model but if it’s good, I’m going to get it.

Still, I want Apple Pay to fail. So much. Why, you ask? WHY?

(tough choice: Platoon or the Reddit “why” meme? ugh)

Here’s why.

First, it’s been just a few weeks and already I hear VCs who previously didn’t care about payments, random entrepreneurs, and journalists talking about Apple Pay like it’s the third coming. The data! What they could do with it! I didn’t hear these people talk this way when previous installments of phone + NFC wallets were introduced, and for a good reason – they are not that interesting, and I think Apple Pay is not interesting in exactly the same way[1].

Second, the talk about Apple now disintermediating banks. Anyone who makes the jump from storing credit cards in a “wallet” to going after issuers or retail banks in one sentence should be awarded a gold medal in mind-athletics. These are completely different activities and mind sets. Most infuriating is the suggestion that disintermediating banks is a corollary to what Apple did with iTunes. You don’t just unbundle banks and sell services through a clunky iInterface. The regulatory and operational impacts are incredibly complicated and Apple, if it ever does anything in the space, will likely partner rather than reinvent. This will further demonstrate what Apple Pay is for me: putting lipstick on a pig.

To further this point, I don’t believe Apple has real payments chops. I didn’t believe that in 2011 and I don’t believe it now. Like Google Wallet, I think Apple will use Pay to do what it knows best; in its case, sell hardware. This isn’t a new sentiment, but it’s still true; I don’t believe the commotion around Apple Pay because I don’t think Apple believes it either. They’re not here to reinvent payments.

Finally, going back to my first point, I don’t think Apple Pay is solving a real problem. That’s the main reason that other wallet providers failed to gain traction. While I understand the idea of Nash Equilibriums and accept that a huge investment in marketing could buy a stake in the market, I’d be surprised (and disappointed, if you couldn’t tell) to discover that consumer behavior was just a marketing campaign away. I don’t believe that, though – I still don’t think Apple Pay solves a problem, I don’t think using it does any good to anyone other than Apple, and I’d rather all that energy put into fitting Apple Pay would be spent on something else.

And that is why I really want Apple Pay to fail.

[1] I guess that makes me a reverse hipster. I hated the idea before it was cool.

Building a stellar team is one of the key activities for a new company. I’ve noticed that hiring dynamics (who gets hired or courted) and success stories (how CEOs discuss their hires) often focus on credentials: which school new hires went to, companies they were a part of, and roles they filled. Conversely, one of my competitive advantages in hiring is hiring the less experienced based on their aptitude and attitude, and helping them grow. This has worked well in FraudSciences, where all the analytics team (including me) had very little experience before coming on board; in Klarna, where the Risk team’s leadership is still comprised of talented people whose first job out of school was at Klarna; and even today, at TrueAccord. Experience is important when you have a specific problem to solve and limited time to solve it. At any other time, hiring inexperienced people is a competitive advantage when everyone else focuses on experience. Why, then, isn’t that a more common practice?

Maybe because hiring inexperienced people early is difficult: they’re, well, inexperienced. Often they won’t come up with unique insights early on because they are unfamiliar with the domain. They will make rookie mistakes. They will be too much or little action driven. They definitely won’t help you hire them by signaling how or where they can help. But following just a few rules will allow you to define where inexperienced people can fit in your organization, make the best of them, and enjoy the advantages: a strong drive, a unique type of creativity sparked by zero pre- and misconceptions, and a much easier supply and demand dynamic. Here are a few pointers for succeeding in hiring inexperienced people.

First, know your domain and how to hire for it. I wouldn’t be able to hire inexperienced engineers, but for data science and operations roles it takes me roughly 20 minutes to know whether an interviewee is a right fit. Knowing the type of skills and mindset you’re looking for is imperative.

Second, you must have an initial mental model for the problem they need to work on, and some kind of onboarding plan (even if that only means a few hours of your time). You can’t just say “here’s a problem, solve it for me” – that’s setting your new hire to fail. The good news are that if you maintain proper documentation and involve every hire in a newer hire’s training, soon they will be able to do the onboarding themselves.

Third, invest a lot of time in mentoring. Identify when they need to “level up” and what that “leveling up” means, then guide them through the process. I learned that the ability to translate a perfect mental model to reality and deliver an MVP is a key capability. I’m ruthless in forcing team members to deliver when I feel they’re ready, even at the cost of their extreme discomfort. Once they’ve leveled up and understand the lesson, you’ll get constant improvement. Bonus: plan ahead and let them take on new roles in your team as they evolve. In the best-case scenario, inexperienced people are like stem cells. Having no previous experience, they’ll immerse themselves in your product, and become ideal candidates for product, marketing and customer success roles.

Fourth, teach them how to say no. By definition, being their manager and an experienced operator means that your opinion will be over-weighted. You won’t identify all of your mistakes in advance, and if the whole team follows you blindly, they’ll exacerbate the situation. You can hire opinionated people, but it’s also crucial to make them aware of your mistakes when you make them, so they don’t delude themselves that you’re perfect. Properly voicing your opinion is an acquired skill, and they need to learn to disagree.

Last, be prepared for mistakes. They will happen, and you’ll need to help them identify, analyze and correct them. Don’t just let them fail. However, know that hiring this way can definitely yield false positives, and be prepared to identify them fast. In the long run, no one likes being stuck in a role they clearly don’t fit.

Are inexperienced candidates the answer to all your hiring woes? Of course not. Experience still plays a huge role in leadership and specialist roles. Still, they represent an incredible talent pool. Especially nowadays, when talent is scarce in many tech hubs, hiring and growing them can fuel the growth you need to make your company successful.

I once read a great piece – in PandoDaily, I think, but can’t find it – about how every startup CEO fears the “How are you doing?” question. How we all need to pretend all the time that everything’s going great. How we should continue to pitch, show the world how awesome we are, even when all is going badly.

I don’t like thinking that this is true since I learn my best lessons from other startup CEOs, as long as they’re willing to share. I learn from their stories about how awesome their company is, sure, but the best discussions revolve around difficulties and how we can overcome them. I also know that “all is going badly” is a typical, and temporary, entrepreneur mindset that can change in minutes. So even if people are defensive, I’m constantly looking for conversation starters that will get folks to tell me more, not less.

I found a good hack for overcoming this barrier and getting good conversations going. When I get asked the question, I say: “You know how startups are: one day you wake up and everything’s terrible, the next day everything’s great. Today’s great. Yesterday was pretty terrible.” I adapt the “terrible” and “great” based on stuff that I feel I can share – difficult time with a contract, a great hire, whatever makes sense.

If said in the right environment and with the right tone, I’ll get some nods approval. Someone might even say “Yeah, today is bad for me”. That’s my in to start a meaningful talk. That’s when I learn my best lessons. You should do that too.

Nobody’s doing great all the time. A little bit of vulnerability goes a long way in getting important exchanges going. Who knows, you might make a friend. Try it!

In 2008 I was the Head of Fraud Analytics for FraudSciences, an Israeli startup developing fraud prevention solutions for eCommerce. One evening in January of that year, we convened to talk about our annual plans. Our COO, a quiet guy in his 50s, said: “First thing’s first: the PayPal test results are in. They want to work with us. But they want us to bear their logo”. Then he let out a small smile, and went silent.

The room was completely silent, too. We’ve never contemplated an acquisition. Everything was going great. Last summer, we ran our system on PayPal’s data as part of due diligence for our impending C round. We were geared for war, and we felt like we were going to win. Nothing was going to stop us.

Other than a $169,000,000 acquisition offer from PayPal, that is.

ALWAYS HAVE A NUMBER.

Fast forward to 2011. I was the VP of Analytics for Analyzd, a predictive analytics shop I started with my brother, Yuval, after leaving PayPal in 2010. Our staff of four flew in to Stockholm from Israel, San Francisco and Berlin and we were running full speed with Klarna’s Risk team, trying to rethink strategy for Klarna’s European expansion as part of a consulting project. It’s been a few good months since we started working and spirits were high – the home team was open to our suggestions, and making a lot of progress. At the same time, Yuval was pitching VCs on an innovative merchant risk product Analyzd was working on. When Sebastian, Klarna’s CEO, asked me to join him in a meeting room, I was preparing for a status report.

If you ever saw Sebastian, you know what his selling technique is. More than 190 cm tall, bright blue eyes, he stares directly at you as he makes his proposition. Now he was staring at me. And he was basically asking, “how much for the whole team?”

Were we planning to get acquired? Not really. We had a lot of incoming opportunities, and a brewing funding round. We knew that high growth startups are almost never valued the same way by founders and potential acquirers. We also knew that this wasn’t our last venture, and Klarna was a rocket ship destined for greatness. So we gave an audacious number; Klarna had to want us bad enough to agree, but wouldn’t feel ripped off if we delivered.

For better or worse, Sebastian accepted.

HOW DO I SELL MY STARTUP?

I get asked this question every few months, interestingly, never by people in the Bay area. The large number of talent acquisitions by Facebook, Google and Yahoo, driven by an incredible competition for talent, is misleading. A group of engineers getting acquired before releasing anything isn’t the norm, but rather the exception, and if you’re looking to flip a company before creating value, I can’t help you. This post discusses getting the offer and deciding whether to sell or not.

ARE YOU TIRED?

Tired founders are one of the most common reasons for selling. At FraudSciences, our team of 3 years was interested in fighting, but the founders had a 4 years’ lead on us, having started working on the technology as early as 2001. They were tired, and they wanted to cash in, and it was their right to do so.

If you’re tired and want to rest and vest, take the offer. Enjoy the short-lived fame of an acquired founder. Recharge, rethink, and then move on to your next thing. Leaving to start something new becomes much easier after some liquidity.

Before you sell, though, consider why you’re tired. Is the company doing well, but you’re tired of your role as CEO or CPO? Maybe getting a strong operator to help you can take some load off. Are you financially strained? VCs have become much more sophisticated in providing liquidity to founders and executives. Neither are reasons to sell if you don’t really want to.

IS THE ACQUISITION ROCKET FUEL FOR YOUR PRODUCT?

Why did you start this company? For many of us, the answer is that there’s a problem we’re passionate about and want to solve. When the acquirer is the right one, joining forces with them can supercharge your business. PayPal with eBay, Android with Google, there are many incredible examples.

In Analyzd, though a much smaller team, we wanted to build a think tank for risk management that will change the way the industry thinks about itself, its goals, and the way it operates. Driven by Klarna’s tremendous growth, we reached amazing achievements in two years, while Yuval built the company’s Product organization from scratch. Would we have reached the same goal going at it alone? I want to believe so. But we made it so much faster with Klarna, and were also able to participate in its amazing success. That’s an all-around win.

MONEY COMPETES WITH MONEY.

If you’re not tired, don’t view an acquisition as supporting your long-term goals and generally tend towards not selling, make sure you make the most out of it. A good acquisition offer effectively gives you a price. It may be a good opportunity to raise your next round and end up with a bigger war chest, with lower dilution than you would have otherwise. Money competes with money. Use the offer to jack up your price, stuff your coffers, and grow your business.

BOTTOM LINE

If you received an acquisition offer, congratulations! You already created value that someone is interested in. Startups don’t get sold, they get bought, and someone wants to buy you. Price negotiations aside, are you ready to sell? Should you sell? What are good reasons to sell? Don’t discuss an acquisition for the wrong reasons; negotiating the sale is much more than just the price, and it will wear you out and kill your business if it falls through at a too late stage. Consider your options, understand what you set out to achieve with your company, and go do it.

Online payments and eCommerce have been targets for fraud ever since their inception. The availability of real monetary value coupled with the ability to scale an attack online attracted many users to fraud in order to make a quick buck. At first, fraudsters used stolen credit card details to make purchases online. As services became more widely used, a newer, sometimes easier alternative emerged: account takeover.

Account takeover (ATO) occurs when one user guesses, or has been given, the credentials to another’s value storing account. This can be your online wallet, but also your social networking profile or gaming account. The perpetrator is often someone you don’t know, but it can just as easily be your kid using an account you didn’t log out of. All fall under various flavors of ATO, and are easier than stealing one’s identity; all that’s needed is guessing or phishing a user’s credentials and you’re rewarded with all the value they’ve been able to create through their activity.

I give this talk about Risk Management called The Top 8 Reasons You Have a Fraud Problem. I learn a lot from the way audiences respond to it, mostly from objections. Most commonly, objections tell me how risk managers paint themselves into a corner in day-to-day work, effectively limiting their ability to drive change or participate in key business decisions.

How do they do that?

First, they make losses their one and only benchmark. It’s easy to focus on reducing losses when the business is taking hits, it’s your job and it’s what’s expected of you. But overcompensating and focusing on aggressive loss reduction whenever possible, while rejecting troves of good customers, will not only limits your business’s growth prospects – it turns the risk manager into a single-issue player. Revenue enablement must be a core KPI for the risk team or it will lose relevance.

Second, risk managers focus on maintaining status quo. When one lacks tools and methods to control their environment, their first response is to try to make sure that nothing ever changes. It’s not the risk team’s job to say no to everything new; it’s their job to find a way to say yes. That’s where the technological and organizational edge is. Find ways to enable new business by shifting risk across your portfolio and finding detection and prevention solutions that support even the craziest marketing ideas. You may flail at first but long-term, you’re building an important muscle.

Last, they tend to distrust the customer. It makes sense – when faced mainly (and often solely) with the malfunctions of the operation, often caused by customers themselves, one tends to stop believing in people’s good intention. That starts becoming a problem when every product design process turns into a theoretical cat-and-mouse game where every possible abuse opportunity must be curbed in advance. You should let users be users, and that means that there will be breakage and there will be losses. Zero losses can easily be achieved by stopping all activity in your system; you should accept that some customers will be bad and find a way to detect these as they act in your system, rather than limit every customer’s ability to use your product.

As I often write, risk teams are multidisciplinary and must think about operations, data science, product design and more. Whenever one focuses on limiting risk instead of trusting users, challenging the status quo and enabling new business, they are contributing to turning risk into a control function, a technocratic add-on that doesn’t deserve a seat at the decision makers’ table. Make sure that’s not you.

(If you want to read some concrete advice on how to do that, take a look at my free eBook here)

PayPal wants to be anywhere payments happen and it seems to be willing to pay a good price for that. Beyond the standard dynamic where the leader buys one of its most affordable up and coming competitors, PayPal acquired a few nice assets:

– The Braintree team is strong, with multiple highly talented folks that are both well known in the industry (= strong advocates) and generally capable.
– The product is superior to anything PayPal has in gateway tech. PayPal acquired Verisign’s gateway a long time back but that integration was not synergistic. With new PayPal management and Braintree’s product, they can get better access to a large and growing volume of gateway payments. This is a good and needed complement to PayPal’s portfolio.
– Last but not least, PayPal bought a foothold in the upmarket – medium and large merchants that usually do not use standard PayPal products due to lack of UX flexibility and integration, as well as strong presence in mobile payments.

So, bottom line, PayPal acquired a team, a product and a market. A smart move.

TrueAccord is reinventing the debt collection process through data and behavioral analytics. Instead of the grim and negative experience it is today, we’re turning the collections process into one that allows debtors to grow, and improve their financial standing. Since we’re dealing with such a contentious situation, customers often reach us angry, disappointed, and negative. This is where we can help them the most.

As a community manager, you will be in charge of communicating with our customers and the general public through the use of our internal tools as well as all standard social media outlet. You will help define, promote and support the company’s brand as well as the impeccable service it aims to provide its customers.

You will:

Manage day to day interaction with customers and solve issues that our system cannot address

Manage the company’s outgoing social media participation through Facebook, Twitter, blog and so on

Monitor the company’s social presence and participate in online conversations wherever needed

Participate in PR and marketing activities

The ideal candidate:

Is passionate about helping people through rough times and can exude empathy and positivity even under pressure

Has superb writing and speaking skills; English is a must, Spanish is a big plus

Is highly proficient and has tangible experience in using social media: Twitter, Facebook, blog and other social media outlets

Is motivated to work for a startup at its early stages and eager to participate in setting a direction for the company’s brand and voice

May have consumer marketing experience – this is a plus

Note: this is not a debt collector’s position. Debt collection experience isn’t required and is in fact discouraged for this position.

Crypto currencies, speciﬁcally BitCoin, are touted as the next big thing in ﬁnancial
services. A secured, encrypted, technologically advanced platform that can support
monetary transactions across the globe is a dream come true for a lot of ﬁnancial
services innovators hoping for a borderless ﬁnancial world. This wave of innovation,
while still nascent, bears a lot of advantages.

It’s important to note, though, that not everything is green in the realm of BitCoin. While
some disadvantages are obvious – exchange rate volatility and lack of sufﬁcient market
making are two obvious ones – some are less obvious, and are sometimes mistakenly
presented as advantages by newbies to the industry. Speciﬁcally, I am referring to fraud
using or on the BitCoin platform, and misconceptions about its feasibility – while some
may think it is much safer than other means of payment, that is absolutely not the case.
With BitCoin’s no-recourse movement of funds, transactions are subject to two types of
fraud: supply side fraud, and social engineering. Their prevalence might hinder mass
adoption of crypto currencies and must be addresses by the ecosystem before those
can be used the proverbial “normals”, the majority of consumers.

When a consumer purchases online using a credit card, the merchant charging the card
isn’t protected from fraud the same way they would be if charging the card in the ofﬂine
world. No issuer, acquirer or card network provides any fraud protection and merchants
can easily be victims of stolen cards or “friendly fraud”, a term describing customers
making actual purchases then charging back alleging fraud, while keeping the goods.

Defending oneself from chargebacks is difﬁcult for merchants and fraud constitutes a major line item in retailers’ ﬁnancial statements. However chargebacks serve a purpose: they
protect consumers from fraudulent merchants, failure to provide service and other
issues. With no ability to reverse transactions, no consumer protection is possible,
hence more and more fraud is perpetrated by those who pretend to be merchants. As
merchants, they can sell a service or product while charging in advance, and never ship
the product (or never own it in the ﬁrst place). Consumers who pay ﬁnd themselves out
of their money and the product they were offered, with no ability to reverse a payment.
Thus, demand side fraud becomes much more appealing to fraudsters.

This lack of protection hurts consumer trust. It also ampliﬁes the damage from each
fraud case. A single fraudster using a stolen credit card may shop for $1000 in stolen
goods; a single fraudulent shop can easily scam dozens and hundreds of consumers.

The other thing to consider is social engineering. Fraud wasn’t invented in the 20th
century nor is it dependent on credit cards. There is a reason why Western Union or
MoneyGram was and still is a favorite for 419-type (“Nigerian”) scams; it, too, has no
option to reverse a payment. Every complex system is as strong as its weakest link, and
BitCoin is no different; the human element is its biggest failure point. As the SEC brings
to trial a man accused of running a BitCoin ponzi scheme, it becomes obvious that no
encryption beats greed and no sophisticated technology beats lack of good judgement.
In that sense, BitCoin isn’t different than any other means of payment, for better or for
worse. It is just not any safer.

Crypto-currencies hold a big promise for a more sophisticated ﬁnancial infrastructure,
but the discussion about them is still limited to a small group of techies. As the world of
those currencies expands to meet the average user, questions regarding consumer
protection and social engineering must be dealt with, otherwise BitCoin will fail to be
adopted. We cannot just trust the users to be sophisticated, as we have all consistently
demonstrated that as a crowd, we are not sophisticated at all. In a sense, the same lack
of a governing 3rd party guaranteeing at least some protection or recourse, justiﬁably
hailed as the platform’s greatest advantage, is also one of its biggest disadvantages.
That, too, needs to be a part of an informed discussion.